Protecting your Future: Fate of estate tax-exemption level unknown

Concerns are rising among many in the financial and estate-planning fields as the year winds down without any more clarity on the future of the estate tax.

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By Bonnie Kraham

recordonline.com

By Bonnie Kraham

Posted Dec. 6, 2012 at 2:00 AM

By Bonnie Kraham
Posted Dec. 6, 2012 at 2:00 AM

» Social News

Concerns are rising among many in the financial and estate-planning fields as the year winds down without any more clarity on the future of the estate tax.

Here's the reality: Without congressional action, on Jan. 1, the current $5.13 million federal estate tax exemption level (twice that much for married couples) will drop to $1 million, and the current 35 percent top tax rate will increase to 55 percent. In other words, many more families will face an inheritance tax, and the bite will be much stronger than in the past.

It is impossible to know for sure what the future holds. The Obama administration and the Republican Congress have different ideas about what the gift and estate tax should look like, and they will be negotiating in the coming weeks to perhaps hammer out a deal. The options include:

revert to the $1 million exemption and 55 percent maximum rate

extend the current plan of a $5.13 million exemption and 35 percent maximum rate, or

compromise at a $3 million or $3.5 million exemption and a 45 percent maximum rate.

Different policy-makers also have different ideas about what assets should or should not included in the "gross estate," which determines the amount to be taxed. For example, the president has suggested that he supports including in the estate certain assets currently held in exempt trusts.

New York also has its own estate tax exemption, which is $1 million per person and has consistently stayed at that level. Although it seems logical that a married couple would be protected for a total of $2 million in New York, advance planning is required to take advantage of both exemptions.

Another gift-planning tool is the IRS "annual gift tax exclusion," which allows the transfer of property tax-free. The exclusion exists above and beyond the estate tax exemption. It currently allows each taxpayer to give up to $13,000 per year to anyone tax-free. Couples are able to transfer $26,000 yearly to each individual they chose. The exclusion level increases to $14,000 in 2013.

However, if you want to protect your assets from nursing home costs, the IRS exclusion amount can create complications. If you gave any gifts in the previous five years before applying for Medicaid to pay for your nursing home costs, including the IRS-allowed annual exclusion amounts, you must report to Medicaid the total amount of the gifts, which then results in a penalty period during which you are not eligible for Medicaid.

Bonnie Kraham is an attorney practicing elder law estate planning with Ettinger Law Firm, 75 Crystal Run Road, Town of Wallkill. She can be reached at 692-8700, ext. 119 or at bkraham@trustlaw.com. This column is intended to provide general information, not legal advice.